The future of employment systems: theory and evidence HR Management

The changes outlined above suggest that there is a move away from internalised employment systems and that organisations are having increased recourse to occupational and open external labour markets (Guest and Hoque, 1994; Katz and Darbishire, 2000). However, the question of how far organisations will go down the externalisation road is open to discussion. In moving away from long-term commitments to employment security, transparent pay structures and opportunities for internal training and promotion, organisations run the risk of undermining employees’ morale and commitment and possibly losing valued employees as a consequence.

Organisations are subject to contradictory pressures with respect to the management of labour. On the one hand employers need to be able to treat labour as a commodity to be hired and fired as production requirements dictate (recall that the demand for labour is derived from the demand for goods and services). At the same time, employers need workers to cooperate actively in the production process. This means more than following management instructions. It also means using their creativity and judgement and taking some responsibility for the quality of their own performance.

The contradiction exists because each of these requirements undermines the other. Workers’ awareness that they will be dismissed when the market dips reduces their trust in the employer and therefore their willingness to cooperate with management. After all, why cooperate in improving efficiency if it means that the job that is lost is your own? At the same time, managers’ need for workers’ cooperation limits the extent to which they can treat workers as a disposable commodity.

Therefore there is never complete trust and cooperation between management and workers but at the same time management has to give some consideration to workers’ interests and concerns. This contradiction can never be ultimately resolved, but it can be managed; how to do this is one of the central concerns of personnel management and HRM. The drive to restructure organisations and employment since the 1980s has intensified these contradictory pressures on workers and managers and the personnel/HRM function.

On the one hand, management claims to need more highly skilled, functionally flexible workers who can be trusted to exercise responsible autonomy. This means that organisations have an interest in developing and retaining skilled employees and establishing a climate of trust and cooperation in employee relations. As we have seen, such outcomes are associated with long-term, stable employment relationships.

On the other hand, pressures to reduce costs and achieve numerical flexibility of labour imply personnel policies that run counter to this by weakening employers’ commitments to long-term employment security and reducing opportunities for career development within the organisation. This raises the questions of how employers are attempting to manage this contradiction and what the implications are for HRM.

The ‘flexible firm’ model

One model of how organisations could respond to the problem of managing these contradictions is for organisations to operate different employment systems for different sections of their workforce (Atkinson, 1984, 1985). This model, known as the ‘flexible firm’, became very influential in HRM thinking during the late 1980s and early 1990s. The model purported to show how firms could minimise employment costs and become more responsive to changes in markets and technology by reorganising their employment systems to achieve a combination of functional, numerical and financial flexibility.

The model is illustrated in Figure below.

The model assumes that various labour requirements can be separated from each other so that they can be satisfied by different sections of the workforce. This enables different employment systems to be applied to the different segments. The main division of the workforce is into ‘core’ and ‘peripheral’ segments. ‘Core workers’ are trained in a range of firm-specific skills that make them functionally flexible, that is, competent to perform a range of different tasks and able to undertake further training as new technologies are adopted.

These workers are the source of creativity, problem-solving capacity and adaptability within the organisation. They may include workers at most levels within the firm, from managerial and professional to skilled production workers. The employer has a strong interest in retaining these workers, so depending on the degree of responsible autonomy and discretion that they are required to exercise in their roles, they will be subject to salaried or industrial internal labour market systems of employment, i.e. favourable pay and benefits, long-term employment security and, to varying degrees, opportunities for internal training and promotion.

‘Peripheral workers’ are workers whose contribution to production, while significant, is not central and whose skills are transferable rather than firm-specific. The size of the peripheral workforce can be expanded or contracted as demand for the firm’s output rises or falls, so it is a source of numerical flexibility for the firm. This group is itself split into further segments that are subject to occupational labour market-based and open external labour market-based employment systems.

Peripheral group I is made up of employees on full-time contracts but with no guarantee of long-term employment, i.e. an occupational labour market. Peripheral group II consists of various ‘non-standard’ forms of employment contract such as short-term contracts, temporary workers, job shares and part-time workers drawn from the open external labour market. A further characteristic of the ‘flexible firm’ model is that it envisages that organizations will cease to use their own employees to carry out some ‘non-core’ functions.

The ‘flexible firm’

The ‘flexible firm’

Instead they will contract these activities out to ‘distanced workers’, i.e. self-employed workers, temporary help agency workers and specialist contracting companies that operate their own employment systems.A key feature of the model is that the peripheral workers provide a ‘buffer’ that protects core workers from external market pressures. When faced with a dip in demand for its product, the firm will cut peripheral jobs while retaining core workers. It can also offset the costs of maintaining high rates of pay and benefits for core workers by ensuring that the pay of peripheral workers is adjusted in line with market rates.

  • The flexible firm: model and reality

It is clear that this model focuses almost entirely on organisations’ labour requirements and neglects the other influences on employment systems that have been identified in this chapter. This is a weakness, since it assumes that managers are free to organize their employment systems in this way. Empirical research in the UK has found very little evidence for the emergence of the flexible firm, largely because of some of these other influences.

Organisations have been constrained in their ability to take such a sophisticated approach to their employment systems because of the inability or unwillingness of managers to take a strategic, long-term approach to business decisions (Hunter and MacInnes, 1992; Sisson and Marginson, 1995). This may have reflected pressure from financial institutions in the City to concentrate on short-term financial performance rather than long-term planned development. Research has also found little evidence of multi-skilling and a functionally flexible core workforce.

This reflects the low priority and limited investment that most British firms give to training, something that has been aggravated by the relatively heavy emphasis on short-term profits in British business that discourages long-term investment in training. Rather than developing internally differentiated employment systems along the lines of the flexible firm, British management has been found to have taken one of three approaches to labour flexibility, each of which is biased towards numerical rather than functional flexibility. These are:

  • To seek cost minimisation through the employment of so-called ‘flexible’ labour, i.e. low-paid, part-time, female workers. This approach takes advantage of the relatively high degree of ‘labour market flexibility’ in the UK. Put simply, this means the relative absence of constraints on hiring and dismissal and until recently, the absence of a minimum wage and the ability to pay part-time and temporary workers less pro rata than permanent full-time workers. However, recent changes in British and European Union legislation may make this cost-cutting route more difficult to pursue in future.
  • To minimise costs by achieving numerical flexibility in ‘core’ as well as ‘peripheral’ functions. Extensive use is made of temporary workers and subcontracting.
  • To combine functional flexibility in core functions with numerical flexibility in peripheral functions by contracting peripheral functions out to external agencies. However, functional flexibility is not developed to a high degree and consists more in the multi-tasking of semi-skilled labour than in the multi-skilling of highly trained workers (Cully et al., 1999).

Evidence from the USA suggests that employers have tended to divide their workforces into primary and secondary segments. The employment system for primary workers continues to be internalised, i.e. based on long-term commitments from the employer and the employee, while that for the secondary segment is externalised, i.e. organised on a short-term hire and fire basis. There is also some evidence that ‘firms which provide better benefit packages to their full-time, more permanent workers are more likely to rely on flexible staffing arrangements’ (Rosenberg and Lapidus, 1999: 77).

This is in line with the idea that numerical flexibility in the periphery protects the employment conditions of core workers. However, this does not mean that US firms have made a strategic HRM choice to adopt the model of the flexible firm in order to combine functional and numerical flexibility. As in Britain, there is little evidence of widespread multi-skilling of ‘core’ workers. As in Britain, the main motive for hiring non-standard workers, particularly selfemployed and temporary agency workers, is to reduce costs.

US employment law forbids employers from offering benefits to one group of full-time employees and withholding them from another, but employers are allowed to withhold such benefits from non-standard workers, i.e. self-employed workers and workers hired through temporary agencies (Rosenberg and Lapiches, 1999: 77; Heckscher, 2000). This has encouraged the wider use of these workers.

Overall therefore, while there is evidence of increased differentiation and segmentation of employment systems in Britain and the USA, there is little evidence that the flexible firm model has been adopted as an employment strategy. Specifically, there is little evidence that employers have reorganised their employment systems to combine numerical and functional flexibility. Instead, numerical flexibility appears to have been extended to the majority of functions within enterprises as employers have taken advantage of weakened employee pressure and influence to reduce costs.

An alternative model? ‘Flexible specialisation’

Critics of developments in Britain and the USA argue that they amount to a ‘low road’ path of economic development based on cheap labour. Low wages reflect low skills and low productivity, which are in turn the product of management’s pursuit of short-term profits and its neglect of long-term investment in training. These biases have been reinforced over the years by the operation of the British and American financial systems and their governments’ unwillingness to provide workers with strong, legally enforced employment rights.

By making it easy for employers to make use of ‘cheap labour’ it has reduced incentives for employers to invest in highly skilled, functionally flexible workforces (Nolan, 1989; Cappelli et al., 1997; Dex and McCulloch, 1997). These critics argue that the long-run consequences of this are increasing technological backwardness, inability to compete in the markets for high-value, sophisticated goods and services, and an increase in low-paid, insecure employment.

The alternative to the ‘low road’ is the ‘high road’ path of development that is based on high skills, high productivity and high wages. The ‘high road’ strategy is one of ‘flexible specialisation’. This seeks to develop new areas of competitive advantage by exploiting new technologies and new market opportunities rather than defending old ones against low-cost competition. The emphasis is on internal, functional flexibility of labour to support adaptation to new technologies and innovations in product design and production methods.

Advocates of the ‘high road’ strategy argue that countries that develop a highly educated and trained workforce and foster labour–management cooperation are better placed to compete in the markets for high-quality goods and services. This is because highly skilled workforces are crucial to high levels of research and development, sophisticated design of goods and services and high quality in their manufacture or delivery. The benefit of this strategy is that premium goods and services sell at premium prices, with higher mark-ups and hence profits.

This supports high wages, good working conditions and comprehensive, generous levels of social welfare provision. The ‘high road’ position on labour market policy is that it should aim to increase the capacity of workers to acquire new, high-level skills, broaden their range of skills and adapt to changes in technology, rather than pursuing wage and numerical flexibility. The viability of this alternative has come to be questioned in recent years. The main reason for this is that competition on the basis of quality is no longer a straight alternative to competition on the basis of price.

High-quality goods can be produced using low-cost methods of production and high-cost producers are less able to rely on product quality to protect them from lower-cost competition. During the 1970s and 1980s, West Germany was seen as the best example of a country that was attempting to take the ‘high road’. Although sometimes exaggerated, the strengths of the German system included a strong legal framework of rights for workers, including co-determination rights, that limited management’s freedom to hire and fire workers at will and provided a basis for worker–management cooperation in the workplace.

They also included a strongly developed system of initial vocational training that ensured a relatively large supply of skilled labour. However, in recent years German producers have come under increased competition and a growing number have located more of their production capacity outside Germany in order to avoid high labour costs. This has also created pressures for greater labour market flexibility in Germany. Trade unions in private and public sector organisations have agreed to various concessions in order to protect job security for incumbent workers, including the systematic use of part-time and fixedterm contracts to fill new vacancies.

This creates a growing division between ‘insiders’, who retain job and income security and access to promotion and career progression, and the ‘outsiders’ on part-time, temporary and fixed-term contracts who increasingly occupy the periphery of the employment system (Jacobi et al., 1998; Katz and Darbishire, 2000).

The virtual organisation, networks and the end of long-term employment?

Some analysts have interpreted recent developments as indicating a transformation in work patterns as greater flexibility is demanded of firms and workers. In their view, traditional careers are a thing of the past. As traditional internal labour markets decline, rather than progressing careers through vertical job mobility based on internal promotion within one organisation, workers now have to make sideways moves across organisations as they search for better pay and opportunities.

It has been claimed that, in future, workers will have to change their careers several times in their working lives, acquiring new sets of skills and changing occupations as old skills and occupations become obsolete (Bayliss, 1998).

For some of these observers, the whole concept of employment is becoming outmoded as a result of the emergence of the ‘virtual organisation’. The virtual organization is presented as the antithesis of bureaucracy and hierarchy. There is minimal formal, permanent organisation and there are almost no direct employees.

The virtual organization is based on networks that bring individuals and groups of workers together for specific projects. Once the projects are complete, the assemblages of workers break up and new assemblages are created for the next set of projects. Some commentators have claimed that this is the future of work and that eventually most workers will no longer be employees of a single employer. Instead they will be ‘portfolio workers’ doing a range of jobs for different employers, as a ‘freelance’ worker or a self-employed producer of services.

The most frequently cited examples of this emergent breed are the selfemployed business consultant, the freelance journalist and television producer (Bridges, 1995; Handy, 1995; Leadbeater, 2000). Therefore the picture being painted is one in which not only are long-term employment relationships giving way to more contingent forms of employment, such as temporary and fixed-term contracts; the employment relationship in general is giving way to commercial transactions between self-employed workers and organisations buying in their services.

This picture, most frequently painted in popular management literature and press comment, is greatly exaggerated. It is true that there has been an increase in the number of temporary and fixed-term contracts of employment in various countries such as the UK, the USA and Spain. It is also true that prospects of long-term, stable jobs have declined for some labour market groups. In Britain and the USA in particular, men are facing increased competition for long-term jobs.

Young men and older workers have been particularly affected in both countries and, in the USA, black workers have suffered the greatest drop in job stability (Gregg and Wadsworth, 1999; Bernhardt and Marcotte, 2000). Despite this, however, long-term employment relationships remain the norm. In 1985, 31.1 per cent of the UK working population were in jobs that had lasted more than ten years. In 1998, the proportion was 28.6 per cent. In 1998, 48.8 per cent of workers were in jobs that had lasted more than five years (Gregg and Wadsworth, 1999).

Clearly the employment relationship is still a long-term one. Neither is there much evidence that the self-employed worker is replacing the employee. Freelance workers and self-employed teleworkers operating from home via computer modems remain a small minority of the British workforce. The proportion of workers who are selfemployed in Britain fell continuously as a proportion of total employment between 1994 and 2001, from 13.5 per cent to 11.7 per cent, and in the European Union from 16.2 per cent to 14.8 per cent (Millward et al., 2000: 48; European Commission 2002: 173, 188).

One reason for this is that most workers value the security and stability of long-term employment relationships. While there is evidence from the USA that most selfemployed workers and independent contractors are happy with their status and do not want standard jobs, most temporary workers would rather be in permanent employment (Polivka et al., 2000; Heckscher, 2000). Dissatisfaction is also widespread among temporary workers in Britain. Moreover, even among self-employed freelancers, there is evidence that insecurity is perceived as a problem (Gallie et al., 1998; Baines, 1999).

A second reason is that the network form of organisation can carry significant disadvantages from a managerial point of view, so managers continue to have an interest in maintaining long-term employment relationships. The widespread use of temporary workers generates friction between temporary and permanent staff, leading to reduced commitment from permanent workers, especially where temporary workers are employed on inferior terms and conditions (Geary, 1992; Heckscher, 2000). Moving from conventional employment to ‘networks’ has been shown to carry the potential for considerable disruption.

A study of a major shift from long-term employment to freelance and contract labour in the British television and broadcasting industry in the 1990s (Saundry and Nolan, 1998) found that it led to an increase in administrative costs, skill shortages and lower morale among workers. Eventually companies began to return to more traditional employment patterns through efforts to ‘improve job security for existing staff and persuade freelancers to return to permanent contracts’ (Nolan and Slater, 2003). Case study research in the USA has produced similar results.

After an initial phase of radical organisational restructuring that broke up internal labour markets, problems of declining product quality, skill shortages and lower morale and employee commitment have led organisations to reintroduce elements of internal labour markets (Moss et al., 2000). The US economist Charles Heckscher gives a vivid summary of these issues from a US perspective: For workers, long-term employment provides security of income and is also frequently valued as a source of psychological stability and personal identity (Sennett, 1998).

For employers, the costs of labour turnover, the need for firm-specific skills and the need to gain workers’ cooperation in production will continue to provide a basis for long-term employment, even in the face of weakened trade unions, changes in the labour market and the wider institutional environment. However, this does not mean that internalized employment systems have remained unchanged. As shown above, although they have not collapsed, they have been weakened and modified as a result of organizational restructuring and the search for labour flexibility.

For the vast majority of employees, the open labor market is a fearful place. It is hard to get training, it is hard to get placement, it is hard to get health care, and it is hard to explain to your family and friends – and to yourself – why you are not working. For managers the turbulence caused by employee turnover is far more dangerous than the possible gain from getting better people. Managers are better off working with what they have, which is at least predictable, than taking a wildly uncertain bet on the labor market. (Heckscher 2000: 277).

Implications for HRM: strategic HRM and the new psychological contract

HRM has been distinguished from so-called ‘traditional personnel management’ on the grounds that:

  • HRM fulfils a strategic business function, i.e. is integrated closely with broader business strategy, i.e. it is vertically integrated.
  • HRM policies are designed to support each other to generate strategic HRM outcomes, i.e. employee commitment, high-quality performance and flexibility in the use of labour.

In other words, it is horizontally integrated. In the context of this chapter, strategic integration of HRM with broader business strategy means defining what an organisation’s labour requirements are given its chosen competitive strategy, e.g. price or quality. The internal coherence or horizontal integration of HRM policies means operating an employment system that satisfies these requirements at least cost. In reality, as we have seen, things are not so simple.

For one thing, employment systems are not the simple embodiment of employers’ strategies for meeting their labour requirements. They are also the outcome of organisational constraints, pressure from workers and external influences from the labour market and wider institutions. The force of these constraints varies across space and time. In Britain and the USA since the 1980s, the decline of trade union influence and connected changes in government policy towards the labour market have provided employers with relative freedom to develop employment systems unimpeded by externally imposed restrictions.

One probable effect of this has been to limit the take-up of HRM by organisations and to bias it in particular directions. Minimal legal regulation of the labour market and weak trade union organisation and influence mean that employers and managers are under little pressure to develop long-term employment relationships, embark on long-term processes of training to develop high-level skills, or involve workers in decision-making. This means that they are less likely to take a strategic, forward-looking approach to the management of labour.

A second and more fundamental factor that undermines the coherence of HRM as strategy is the fact that management’s labour requirements are not straightforward but contradictory. Management requires disposability on the one hand, commitment and cooperation on the other. This means that HRM policies can never be entirely coherent, even in the relative absence of external constraints on managerial action. For example, as we have seen, commitment and flexibility are contradictory goals; policies that aim to achieve one threaten to undermine the other.

Consequently HRM strategies can never be holly successful. This is illustrated by the way strategies aimed at reducing labour costs by downsizing and delayering organisations and increasing labour flexibility have generated significant costs in terms of skill shortages, lower morale and declining organisational commitment which threaten organisational performance. Within HRM one of the major themes in recent discussion has been how organizational restructuring has undermined employees’ trust in the organisations that employ them and what can be done to build a new basis for employee commitment and cooperation with management.

As shown in Chapter, discussion of this issue has revolved around the concept of a ‘new psychological contract’ between the organisation and the individual employee to replace the ‘old’ (Bendall et al., 1998; Sparrow, 1998). Significantly, in most accounts, the ‘new’ psychological contract being ‘offered’ by organisations seeks to replace commitments to providing long-term employment security with commitments to providing workers with educational and training opportunities to enable them to acquire transferable skills to enhance their employability.

This indicates that management is persuaded, for the time being at least, that commitment to longterm employment security and planned career progression within the firm are no longer practical propositions and is trying to get workers to accept this proposition also. What are the prospects for negotiating a new basis for the employment relationship on these lines? How can employers expect to get high commitment and effort while offering less security and fewer prospects for career advancement? One possible answer is that workers who are still in jobs are too afraid to resist, since to do so would be to invite dismissal. Slower economic growth, the decline of manufacturing and, of course, organisational restructuring itself have led to widespread job losses, historically high levels of unemployment and a heightened sense of insecurity among workers.

The extent to which employment has become less secure has been debated widely in Britain and the USA. There is no strong evidence for a major increase in employment insecurity in general but there is evidence that for certain groups such as younger men, the risk of job loss has increased and the probability of getting a long-term job declined (Gregg and Wadsworth, 1999; Heckscher, 2000). Such workers may well be willing to submit to management’s demands in the hope of avoiding job loss or being taken on as a permanent employee.

On this view the ‘new psychological contract’ is nothing more than an expression of the increased inequality of power between employer and employee. A more optimistic and sympathetic judgement would be that the success of the ‘new psychological contract’ depends on the ability of employers to provide workers with opportunities to develop their skills and experience in ways that enable them to improve their external job prospects. But how likely is it that employers will do this? It seems probable that those best able to take advantage of such opportunities will be the most able employees, yet these will be the ones that employers want to retain.


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